UK interest rates to rise from early-2015: CBI

One of the U.K.'s top business lobby groups has upped its growth forecast for the British economy in 2014, but warned that political uncertainty remained a "major risk" to the country's recovery.

Encouraging signs that the recovery is becoming more broad-based led the Confederation of British Industry (CBI) to raise its 2014 and 2015 growth estimates for the U.K. on Monday. It now expects the U.K. economy to expand by 3 percent this year and by 2.7 percent in 2015, up from previous expectations of 2.6 percent and 2.5 percent respectively. The group also said it expected interest rates to start rising in the first quarter of 2015.

In the first quarter of this year, Britain posted GDP growth of 0.8 percent quarter-on-quarter, marking the fifth consecutive quarter of expansion.

"The recovery is advancing after a strong performance in the first quarter of 2014. Prospects are bright and we expect the recovery to broaden out this year, with greater support from business investment in particular," John Cridland, director-general of the CBI, said in a statement.

It comes after the National Institute of Economic and Social Research (NIESR) said on Friday that the U.K.'s economic output would top its pre-crisis peak in the second quarter of this year. It also upped its growth forecasts for the U.K. economy for this year and next.

Political concerns

As 2015's general election looms, however, the CBI warned that political uncertainty could threaten the U.K.'s recovery. It urged politicians "of all shades" to put incentivizing business investment ahead of short-term electioneering.

"The U.K. now has more stable economic foundations, and political risks must not jeopardise this," Cridland said.

The priority for the next government should be to keep the deficit reduction strategy on track, tackle the U.K.'s economic challenges and reform public services, argued Katja Hall, chief policy director at the CBI.

"Pre-election pledges should not deter overseas and home-grown investors and entrepreneurs, nor limit a future government's ability to deliver prosperity in the U.K.," she added.

The U.K. housing market also came under CBI scrutiny, with Cridland calling on the Bank of England to act if the market becomes overheated. Housing transactions remain 29 percent below their 2006 pre-crisis peak but they are beginning to pick up, thanks in part to government schemes such as Help To Buy. According to the CBI, house price inflation is expected to rise to 8.2 percent this year, from 3.6 percent in 2013 and 5.1 percent next year.

""We have to remain alert to the risks posed by unsustainable house price inflation,and the Financial Policy Committee is poised to act when necessary," Cridland said in the CBI statement. .

The CBI also highlighted that business investment in the U.K. was on the rise. In the final quarter of 2013 it was 8.7 percent higher than the year before, and the trend is gaining momentum. It now expects business investments to grow by 8.3 percent this year and by 9.1 percent in 2015.

However, the lobby group warned that net trade was unlikely to provide much support to gross domestic product (GDP), despite a pickup in exports, as stronger domestic demand will boost imports.